Taking Charge.

Why we need to fund education federally and how we can do it

GEORGE W. BUSH IS NOW THE THIRD President and the second Bush to claim to be our "Education President." Yet neither he nor anyone else can plausibly claim that title when less than one-tenth of school funding comes from federal sources, and when vast disparities between per pupil spending exist because of the antiquated link between school funding and state and local taxes.

As a result, America's education debate is as surreal as it is hypocritical. Our nation's leaders speak and act as though the future of American education will be determined in Washington, and routinely promise to make education reform one of their major priorities in office. Yet the actual role of the federal government in education policy remains minuscule. Local, state, and federal governments spent $348.9 billion on K-12 education in 1999-2000, of which a paltry eight percent was supplied by federal funding.

This means that all the grand pronouncements and national debates about vouchers, charter schools, national standards, class size, and teacher salaries are disingenuous to the degree that they presuppose a basic parity in school funding and a substantial federal role in financing education--neither of which actually exists. As long as the federal government contributes next to nothing to schools and the level of per-pupil funding is determined by the vagaries of local financing, the national politics of education will continue to be a politics of symbolism. A perfect example of the gap between reality and rhetoric is Bush's proposal to help poor children escape failing schools by offering them a voucher of $1,500, less than one quarter of the cost of educating the average child.

The future of our education system is too important to be left to ideology, timid thinking, or special-interest politics--which are precisely what Republicans and Democrats have offered up. If we are serious about improving our education system, then we have little choice but to confront this underlying cause of our education predicament and consider a genuine solution to it: equalizing school funding on a national basis.

Separate and Unequal

Our nation suffers from a troubled and class-stratified system of primary and secondary schools--which in effect means our public schools since a full 89 percent of American K-12 students attended public schools in 1999. Specifically, there is a split between our often top-notch suburban schools and our many dreadful and dysfunctional urban schools. The problem with American education is not a lack of overall school funding. To the contrary, we spend a greater share of our national income on K-12 education than any other advanced industrial democracy, with the exceptions of Canada and Denmark. The main problem is the extreme variation among school districts, rooted in our reliance on the link between school funding and property taxes, supplemented by state sales taxes. The traditional practice of funding schools primarily by such taxes results in dramatic disparities among states, cities, and even neighborhoods.

Per-pupil spending on education in 1998 varied from an average of $4,000 in Mississippi to more than $9,000 in New Jersey, even after adjusting for cost of living differences. And disparities like these are also common within single states. In Virginia, for instance, average per-pupil spending in Hanover County in 1997 was only one half of spending per pupil in Arlington County. Needless to say, such a wide chasm in the amount of money dedicated to each child translates into lower teacher salaries and hence less-qualified teachers, larger class sizes, and inferior facilities for schools on the losing side of this highly unequal playing field. These deep inequities only compound the disadvantages of class, culture, and poverty that already afflict our nation's inner cities, creating an environment that is even less hospitable to the process of learning. With educational institutions that reinforce rather than reduce the injuries of social inequality, is it really much of a surprise that so many of our inner-city schools are islands of despair?

The perverse design of America's current school funding mechanism is easy to illustrate. Suppose you have an impoverished inner city with a per pupil taxable property base of $60,000, neighbored by an affluent suburb with a per pupil property tax base of $300,000. The inner-city would have to levy a painfully high 10-percent property tax to raise the $6,000 per student that the suburb could raise through a mere two-percent property tax. To make matters even worse, the state and local property and sales taxes that are the backbone of today's school funding system are extremely regressive in their own right, meaning that they disproportionately burden the less well-off. The lower your income, the higher a share of your income typically goes to these taxes. When it comes to school finance, then, low-income Americans are doubly punished. Poor districts must impose higher tax rates to obtain the same amount of money that affluent districts can raise with low rates; and those higher taxes are often in the form of regressive property and sales taxes.

Recognizing these problems, a growing number of states have begun to equalize funding for local public schools on a statewide basis. Since 1971, when the California Supreme Court, in Serrano v. Priest, announced that the use of local property taxes to finance primary education violated the equal protection clause of the California constitution, 44 of the 50 states have been sued by plaintiffs on similar grounds. The supreme courts of 19 states have followed California's lead in holding that state constitutional provisions mandate the revision of public school finance to meet basic standards of equity. As a result of these lawsuits and the state legislation they inspired, by 1998 the proportion of educational funding provided by the states (48.4%) surpassed that provided by local districts (44.5%).

The logic behind these reforms was stated by the Vermont Supreme Court: "The distribution of a resource as precious as educational opportunity may not have as its determining force the mere fortuity of a child's residence." While these sure-level reform efforts are encouraging, they do not go far enough and can sometimes lead to unintended disaster. Indeed, the experience of California illustrates the danger of equalizing education funding on a state basis without reducing or eliminating the link to property taxes. As Californians discovered in the wake of Serrano v. Priest, affluent property owners can all too easily be tempted to take part in revolts against increases in property taxes when such revenues are suddenly diverted to pay for schools in other districts. Many analysts blame Proposition 13, which restricts the ability of Californian localities to raise property taxes, with the decline of the state's once-great K-12 system.

Equalizing School Funding Nationwide

If a child's education should not depend on "the mere fortuity of a child's residence" in this or that county within a state, then surely it should not depend either on the child's residence in this or that state in the United States. If it is unjust and inefficient for school quality to vary wildly between rich and poor neighborhoods within a state, it is equally unjust and inefficient for school quality to vary between rich and poor states. "Most of the resource inequality cannot be solved at the state level," Education analysts David Grissmer and Ann Flanagan have observed in a report for RAND. "States spending the least are southern and western states that also have a disproportionate share of the nation's minority and disadvantaged students. Only the federal government can address this issue of interstate inequality in school spending."

The United States finances K-12 education in an extremely unusual manner. Among OECD countries in 1995, central governments accounted for an average of 54 percent of funding for primary and secondary education, seven times the rate in the United States, while regional and local governments split the rest. Although President Bush has recently proposed a slight increase in federal school funding, this would barely begin to address the magnitude of the problem.

A proposal to equalize school funding nationally is radical--in the sense that it tackles the root of the problem of national disparities in school funding--but it is the only way to ensure that all students across the country have access to a quality education on a relatively equal basis. The question of national equalization of funding ought to be debated before the more familiar but arguably premature proposals like national school choice and national school standards. The fact that the public, encouraged by many political leaders, erroneously assumes that the federal government already has a huge role in education funding provides all the more reason to make the question of how schools are financed the primary topic in the debate about educational reform.

We should make it clear that we are not proposing massive new federal funding in addition to present levels of state and local funding. Instead, we are proposing a change in the source of school funding, while keeping today's overall amount of spending on education at a similar level. The overall amount should be the subject of an important debate, but not the one we are trying to stimulate.

Finding A New Source of School Revenue

The new federal funding could come from any of a number of sources. The Nixon administration, for instance, considered creating a new federal sales or value-added tax to fund public schools, thereby reducing reliance on local property taxes (this idea was never acted upon). A federal sales or property tax, however, would be just as regressive as the state and local versions, and thus suffer from the same political liabilities. Indeed, a national property tax or sales tax to bring about national equalization of school funding might recapitulate, on a national scale, the unintended consequences of California's disastrous experiment.

A regressive tax, be it national, state or local, that falls heavily on middle-class and working-class voters is far more likely to trigger a tax revolt that succeeds at the polls than a progressive tax that falls disproportionately on the well-to-do, who for all their grumbling may fail to find many allies among the majority of the electorate. One way to achieve the goal of progressivity would be by paying for schools with revenues from the federal income tax.

We recommend yet another approach: equalizing school funding nationwide by means of a progressive national consumption tax. A person's annual consumption could be calculated based on a simple formula: income minus savings and investment (and, perhaps, some deductions) equals consumption. Unlike regressive sales taxes, a personal consumption tax can be made highly progressive by exempting a certain amount--say the first $15,000 of consumption--so that the average cost of basic necessities like housing, food, and transportation would be free from taxation. Naturally, the exemption level should be increased somewhat for each dependent. Because sales or property taxes do not differentiate between individuals with dependents and those without, our system would become more family-friendly in the process of becoming more progressive.

A new national consumption tax should be dedicated to paying for primary and secondary educational expenditures. But its benefits would not be limited to equalizing school funding nationwide or to making our whole tax system more progressive. In addition, it could also solve the growing Internet sales tax problem. That is, the revenues raised by a progressive national consumption tax could be used to replace state sales taxes as well as property taxes.

The proliferation of e-commerce has made the case for replacing the state sales tax system all the more urgent. Members of Congress no doubt thought they were buying time to defer controversial decisions by enacting an Internet tax moratorium signed by President Clinton on October 21, 1998. But this moratorium inadvertently creates an artificial divide between brick-and-mortar businesses and Internet-based ones, which disadvantages the former in favor of the latter, and threatens the revenue base and hence fiscal solvency of many states. When you reflect that much sales tax revenue goes towards schools and education, the idea of maintaining the current sales tax system but exempting all types of e-commerce is simply perverse. The best solution is not just to level the playing field between "brick" and "click" industries, but rather to eliminate state sales taxes altogether.

Why not replace our fifty separate state sales tax systems with a single and simple progressive national consumption tax, whose proceeds are rebated to the states on a per pupil basis, thereby equalizing school funding while solving the Internet tax problem at the same time? This proposal would also serve another particularly timely public purpose by creating a bias in the tax code in favor of savings. To the extent that consumption taxes encouraged higher savings, they could increase the pool of capital available for investment, and strengthen our overall economy in the process.

Raised nationwide, revenues from this consumption tax would be distributed to the states on a per-pupil basis. For convenience, the IRS might collect the money, although the federal government would receive none of it. For this system to work, Washington would have to distribute the money in block grants with few or no strings attached, and the states would need to reduce their other taxes by the amount that they receive as their share of the national consumption tax. Needless to say, conditioning the provision of new federal funds to states on the basis of the corresponding elimination or reduction of state sales and property taxes would be a powerful incentive for compliance.

In order to avoid subsidizing the failure of entrenched school bureaucracies, it would be best to allocate the money directly to students rather than to schools. The allocation of funds on a per-pupil basis would be simplest and most beneficial in a system that permitted some kind of school choice--either among public charter schools or among public and private schools. In addition, the goal of equalizing access to educational opportunity would require certain variations in the distribution of national funds to reflect differences in the cost of living in different neighborhoods and regions. The same dollar buys more in New Mexico than in New York.

Critics might object that our proposal would lead to a loss of local control over school curricula and standards, but this danger is easily exaggerated and the opposite is more likely to be the case. First, in areas from highway construction to welfare, there is a long tradition of "cooperative federalism" combining federal funding with local discretion. Our proposal for national equalization of school funding merely applies the logic of cooperative federalism to the area of education. Nevertheless, it would be wise to collect and administer the national school funds by means that would prevent Congress from micro-managing the way the money is spent. What is more, national equalization could easily enhance local control, rather than undermine it. For instance, allowing the money to flow directly to parents, under a school choice plan, would increase parental influence at the expense of bureaucrats in school districts' central offices.

Change is the Norm

Equalizing school finance nationwide--by whatever method--might be dismissed as too radical to be taken seriously. But who in the 1970s could have guessed that state governments, which contributed little to school finance, would be paying for more than half by the end of the twentieth century, and that crusades for statewide equalization would go from victory to victory?

Some voters in affluent school districts would undoubtedly resist national equalization of school funding--just as some resisted statewide equalization plans. It is interesting to note, however, that the major political opposition has coalesced in states like Vermont which, like California, chose to equalize school funding by means of a statewide property tax. This suggests that the potential of a tax revolt can be minimized by the use of progressive taxes that fall relatively lightly on most voters, like a consumption tax. Meanwhile, the predictable opposition from teachers' unions in affluent districts might be overcome if the equalization of school finance were accompanied by an increase in teachers' salaries (a reform that would be a good idea in itself).

If the national debate about school equalization is anything like the debates in the states, enlightened self-interest is likely to prevail over parochialism. Indeed, the depth of public support for equalizing school funding is surprising.

A 1999 survey by National Public Radio, the Kaiser Family Foundation, and the Kennedy School of Government revealed 83 percent of Americans favor equalizing school funding, even at the price of transferring resources from wealthy districts to poor ones. A substantial majority of 70 percent responded positively to the suggestion that the spending of wealthy districts be "capped so that poor districts are not left behind." Although the question involved only state efforts to equalize public school funding, a proposal to equalize school funding on a nationwide basis would likely generate comparable levels of public support among suburban voters as well as urban voters. For instance, recent polling data from New York state reveals that even suburban voters favor increased state spending on urban schools by a margin of 63 to 28 percent.

Public support might drop if increasing spending for the poorest school districts required major funding cuts for affluent districts. But the polling data suggests that a majority of Americans would accept slight reductions in spending on affluent students, in order to ensure that all Americans, no matter what their family background or residence, receive good educations. What is more, raising the overall amount of educational funding nationwide (rather than providing a revenue-neutral alternative, as we propose) could permit per-pupil funding in affluent districts to remain the same even with school funding equalized across the country.

Advocates of radically different educational reforms should agree that equalizing school funding across the country is a necessary precondition for their favored reforms. That is, conservatives who favor school vouchers, and liberals who want to preserve the public school system while reducing class sizes and paying teachers more, might agree on the preliminary step of extending the logic of in-state school funding equalization countrywide. Any nationwide system of school vouchers presumably would be based on equal funding. For their part, liberals cannot consistently support national standards while tolerating gross regional differences in the resources devoted to K-12 education. Right, left, and center can debate about how the national money should be spent--after uniting to make the funding of K-12 education a national responsibility.

Far from breaking with our nation's heritage, equalizing school funding is the logical next step in the evolution of American public education. With each successive wave of economic transformation, since the initial Industrial Revolution of the 1800s, U.S. government support for education has expanded. In the First Industrial Era of the early 19th century, the public or common school became widespread, while the U.S. government founded the land-grant university system. Even so, in 19th-century America, the formal education of most Americans was limited to grades one through eight. In 1890, for example, fewer than five percent of teenagers went to high school, and an even smaller number went to college. In the Second Industrial Era that began in the late 19th century and lasted until the late twentieth century, a combination of compulsory school attendance laws with child-labor laws removed children from factories, fields, and mines and put them in classrooms. Then in the first half of the 20th century, high school attendance became the norm rather than the exception.

In these previous eras of school reform, those wedded to the old way of doing things have offered political opposition. Repeatedly, proponents of innovation in the design of American education prevailed over resistance by stressing one of three arguments: social, political, or economic. The social argument, which holds that schools are a ladder of social mobility, has been powerful in every era and retains its appeal today. The political argument, which helped establish the legitimacy of the early public schools, held that a democracy required minimally educated citizens. The economic argument, that the demands of an industrial economy required more years of school, was most influential in winning support for the universalization of high school (indeed, education historian Diane Ravitch argues that the emphasis on vocationalism in 20th-century educational thought sometimes went too far).

Now it is time to change again. Marc Tucker, another leading expert on American education, has observed that the present-day system of primary and secondary education in the United States "was installed in the 1920s not to insure high-quality remits, but to enable the country to build a mass-production education system that would ensure minimum quality with high rates of efficiency. It is no more suited to the modern requirement for high quality than the industrial management systems rejected in the 1980s in the search for quality in the business world." Indeed, as Daniel Bell explains, "if industrial society is based on machine technology, post-industrial society is shaped by an intellectual technology, and if capital and labor are the major structural features of industrial society, information and knowledge are those of the post industrial society."

In the case of national tax policy, as well, fundamental change every few decades has also been the norm, not the exception. Throughout the 19th century, for instance, most of our federal revenue came from tariffs on imported goods. Then the bulk of federal revenues shifted to a broad-based progressive income tax during the early part of the 20th century and, finally, in the second half of the 20th century, turned increasingly to regressive Social Security and Medicare payroll taxes. Meanwhile, the balance between state and local taxes, on the one hand, and federal taxes, on the other, shifted just as profoundly. Before the New Deal, state and local taxes raised more of our total government revenue than federal contributions did. Since the 1930s, however, the proportions have been reversed: Two out of every three dollars flowing to government have been collected at the federal level. In the 21st century, as a result of the shift to an Information Age society, America's tax system should shift as profoundly.

Attaining educational equality could turn out to be a quadruple play. Replacing state and local sales and property taxes with a progressive national consumption tax rebated to the states on a per-pupil basis would not only help ensure nationwide parity in school funding, but it could also render our whole tax system more efficient and progressive, provide an elegant solution to the Internet tax problem, and create a powerful new incentive for increased personal savings.

The final decades of the 20th century saw a debate over statewide equalization of school funding, which should now be succeeded in the first decade of the 21st century by a long-overdue debate about nationwide equalization. The best way to equalize school funding can and should be the subject of a national conversation. But the goal should be clear: to ensure that every American child's access to quality education no longer depends, as it now does, on accidents of geography. The big question is which political party and president will have the courage and foresight to embrace this goal first, thereby providing the American people with what they really want: fundamental reform of our ailing educational system.

TED HALSTEAD is President of the New America Foundation, where MICHAEL LIND is a Senior Fellow. This article is adapted from their forthcoming book The Radical Center: Doubleday, Fall 2001.